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Is what Goldman Sachs did nothing but gambling?

Lawmakers at the Goldman Sachs hearing repeatedly compared the activities of investment banks to gambling. But that's not how Goldman officials view it. Here's how both sides argue the issue.

By Staff writer / April 28, 2010

Goldman Sachs chairman and chief executive officer Lloyd Blankfein testifies before the Senate Subcommittee on Investigations hearing on Wall Street investment banks on Capitol Hill Tuesday.

Susan Walsh/AP

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Washington

Is Goldman Sachs CEO Lloyd Blankfein a bookie?

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That sounds harsh, but on Tuesday, senators repeatedly compared the activities of investment banks to gambling as they grilled Mr. Blankfein and other Goldman Sachs officials about short selling, synthetic collateralized debt obligations, and other arcane Wall Street arts.

Things went so far that eventually Sen. John Ensign (R) of Nevada, whose constituents include Las Vegas casinos, took umbrage. He said that his state’s version of gambling is fairer than what happens in the trading rooms of Manhattan.

In Vegas, the croupiers do not change the odds on a game while it is in progress. But on Wall Street, bankers are “tweaking the odds in their favor” while deals progress, said Senator Ensign.

Eventually, Blankfein had enough. He objected to the continual use of the word “bet” by subcommittee chairman Sen. Carl Levin (D) of Michigan to describe short selling, an activity in which profit stems from a decline in asset price.

“You know, we live in different contexts,” Blankfein said to Senator Levin.

They do, indeed. Here’s a summary of how both sides view this question:

Why Blankfein’s a bookie

The underlying activity of financial trading looks a lot like betting on a horse or other sports event. Profit or loss depends on an unforeseen outcome over which the investor has little direct control.

Of course, that’s the way financial markets have operated for centuries. What lawmakers on Tuesday appeared to be homing in on was this: trading a new kind of financial instrument that seems to have no connection to any underlying real asset at all.

This instrument is the synthetic collateralized debt obligation (CDO). It’s a bundled investment that increases or decreases in value as its underlying bonds, or mortgages, or whatever, fluctuate in price. But the owner of a synthetic CDO does not actually own any piece of these underlying assets. Instead, CDOs are baskets of derivatives known as credit-default swaps.

Got that? Here’s how Blankfein described a housing-based synthetic CDO to senators on Tuesday: “It references securities indexed to particular mortgages.”

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